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entitled 'Federal Employees' Health Plans: Premium Growth and OPM's
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Report to the Subcommittee on International Security, Proliferation,
and Federal Services, Committee on Governmental Affairs, U.S. Senate:
United States General Accounting Office:
GAO:
December 2002:
Federal Employees’ Health Plans:
Premium Growth and OPM’s Role in Negotiating Benefits:
GAO-03-236:
GAO Highlights:
Highlights of GAO-03-236, a report to the Subcommittee on International
Security, Proliferation, and Federal Services, Committee on
Governmental Affairs, U.S. Senate
Why GAO Did This Study:
Federal employees’ health insurance premiums have increased at double-
digit rates for 3 consecutive years. GAO was asked to examine how the
Federal Employees Health Benefits Program’s (FEHBP) premium trends
compared to those of other large purchasers of employer-sponsored
health insurance, factors contributing to FEHBP’s premium growth, and
steps the Office of Personnel Management (OPM) takes to help contain
premium increases compared to those of other large purchasers. GAO
compared FEHBP to the California Public Employees’ Retirement System
(CalPERS), General Motors, and a large private-employer purchasing
coalition in California as well as data from employee benefit surveys.
What GAO Found:
FEHBP’s premium trends from 1991 to 2002 were generally in line with
other large purchasers—increasing on average about 6 percent annually.
OPM announced that average FEHBP premiums would increase about
11 percent in 2003, 2 percentage points less than in 2002 and less
than some other large purchasers are expecting. FEHBP enrollees
would likely have paid even higher premiums in recent years if not
for modest benefit reductions and enrollees who shifted to less
expensive plans.
Increasing premiums are related to the plans’ higher claims
expenditures. For FEHBP’s three largest plans, about 70 percent of
increased claims expenditures from 1998 to 2000 was due to
prescription drugs and hospital outpatient care. Most of the increase
in drug expenditures was due to higher plan payments per drug, while
the increase in hospital outpatient care expenditures was due to
higher utilization.
OPM relies on enrollee choice, competition among plans, and annual
negotiations with participating plans to moderate premium increases.
Whereas some large purchasers require plans to offer standardized
benefit packages and reject bids from plans not offering satisfactory
premiums, OPM contracts with all plans willing to meet minimum
standards and allows plans to vary benefits, maximizing enrollees’
choices. Each year, OPM suggests cost containment strategies for
plans to consider and relies on participating plans to propose
benefits and premiums that will be competitive with other
participating plans.
OPM generally concurred with our findings.
[See PDF for image]
[End of figure]
www.gao.gov/cgi-bin/getrpt?GAO-03-236.
To view the full report, including the scope and methodology, click
on the link above. For more information, contact Kathryn G. Allen
on (202) 512-7118.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Rise in FEHBP Premiums Has Been Similar to Increases for Other Large
Purchasers:
Increases in Expenditures for Prescription Drugs and Hospital
Outpatient Care Drove Most of Recent Rise in Premiums for FEHBP’s
Largest Plans:
OPM’s Reliance on Competition among Plans and Annual Negotiations to
Contain Premium Increases Differs in Some Ways from Other Large
Purchasers:
Comments from OPM and Other Reviewers:
Appendix I: Methodology:
Appendix II: Comments from the Office of Personnel
Management:
Tables:
Table 1: FFS Plans Participating in FEHBP, 2002:
Table 2: Cost Drivers for the Three Largest FEHBP Plans, 1998 to 2000:
Table 3: Selected Characteristics of FEHBP Compared to Health Benefit
Programs Offered through CalPERS, PBGH, and GM:
Figures:
Figure 1: Average Annual Change in Premiums, 1991 through 2003:
Figure 2: Change in Per-Enrollee Claims Expenditures due to Plan
Payments and Utilization for Major Categories of Health Care Services
for the Three Largest FEHBP Plans,
1998 to 2000:
Abbreviations:
BCBS: Blue Cross and Blue Shield:
CalPERS: California Public Employees’ Retirement System:
FEHBP: Federal Employees Health Benefits Program:
FFS: fee-for-service:
GEHA: Government Employees Hospital Association, Inc.
GM: General Motors:
HMO: health maintenance organization:
HRET: Health Research and Educational Trust:
OPM: Office of Personnel Management:
PBGH: Pacific Business Group on Health:
POS: point of service:
PPO: preferred provider organization:
United States General Accounting Office:
Washington, DC 20548:
December 31, 2002:
The Honorable Daniel K. Akaka
Chairman
The Honorable Thad Cochran
Ranking Minority Member
Subcommittee on International Security,
Proliferation, and Federal Services
Committee on Governmental Affairs
United States Senate:
After a period of decline in the mid-1990s, federal employees’ health
insurance premiums have increased at double-digit rates in recent
years. During the past 5 years, premiums for the Federal Employees
Health Benefits Program (FEHBP)--which is the nation’s largest
purchaser of employer-sponsored health benefits with about 8.3 million
covered lives--have increased cumulatively by about 50 percent. For
2003, premiums are expected to increase on average about 11 percent
following an average increase of about 13 percent in 2002.
Concerned about the continuing increases in FEHBP premiums, you asked
that we analyze these premium increases and the Office of Personnel
Management’s (OPM) approaches to containing cost growth and compare
these increases and approaches to other large public-and private-sector
purchasers of employer-sponsored health benefits. To do this, we
examined:
* trends for FEHBP’s premiums compared to premiums for other large
purchasers over the last decade,
* factors that contributed most to FEHBP’s recent premium growth, and:
* steps that OPM takes to help contain premium increases compared to
those of other large purchasers.
To identify trends in the federal government’s and other large
purchasers’ health insurance premiums over the last decade, we obtained
premium data from OPM, from the California Public Employees’ Retirement
System (CalPERS)--the second largest public purchaser of employee
health benefits--and, for other large purchasers, from the Kaiser
Family Foundation/Health Research and Educational Trust (Kaiser/HRET)
surveys of private employer-sponsored health benefits. To identify
factors contributing to FEHBP premium trends, we analyzed available OPM
data, including summary reports it received on enrollees’ health care
utilization and related claim expenditures for 1998 through 2000 from
the three largest nationwide plans participating in FEHBP. These three
plans are all fee-for-service (FFS) plans and represented 90 percent of
FEHBP enrollment in FFS plans and almost two-thirds of FEHBP enrollment
in all plans. We also interviewed OPM officials. To ascertain how OPM
and selected large purchasers attempt to control costs, we interviewed
actuaries and other officials at OPM, CalPERS, General Motors (GM)--the
largest private purchaser of employee health benefits in the United
States--and the Pacific Business Group on Health (PBGH), a California-
based purchaser representing 19 large employers. To obtain information
on large purchasers’ cost containment strategies in general, we
reviewed the literature and interviewed employee health benefit
consultants. In addition, we reviewed the applicable statute and
regulations and interviewed representatives of major plans
participating in FEHBP and federal employee unions.
Appendix I provides more detailed information on our methodology. We
performed our work from December 2001 through December 2002 in
accordance with generally accepted government auditing standards.
Results in Brief:
Since 1991, the average increase in premiums for FEHBP has been similar
to those of other major purchasers. Premiums for FEHBP, CalPERS, and
other large employers increased, on average, about 6 percent per year
from 1991 through 2002. FEHBP premium increases were lower than other
large purchasers’ average from 1991 to 1996, while from 1997 to 2002
FEHBP’s premium increases were higher than other large purchasers. The
11 percent average premium increase in 2003 for all FEHBP plans that
OPM announced in September 2002 represents a lower rate of increase
than FEHBP’s 13.3 percent average increase in 2002 and is less than
some employee-benefit experts expect for many other purchasers. For
example, CalPERS health maintenance organizations’ (HMO) premiums were
expected to increase by an average of 26 percent in 2003. FEHBP
enrollees would likely have faced higher premium increases in recent
years but for some modest reductions in benefits--mostly increased
enrollee cost sharing--and their shifts in enrollment to plans with
lower premiums.
FEHBP premium trends are influenced by plans’ claims expenditures.
Increasing expenditures for prescription drugs and hospital outpatient
care accounted for the largest share of increased claims expenditures
in recent years for the three largest FEHBP plans covering most FEHBP
enrollees. The increases in claims expenditures represented changes in
plan payments and utilization for these categories; for drugs, most of
the increase was due to higher plan payments per drug dispensed, while
for hospital outpatient care the increase was due to higher
utilization.
OPM relies on enrollee choice among competing plans and its
negotiations with plans to help contain FEHBP premium growth, while
other large purchasers adopt some different approaches. To maximize
enrollee choice, OPM allows plans that meet minimum standards to
participate in FEHBP. OPM does not require a standardized benefit
package, resulting in plans competing for enrollment based on varying
benefits. Plans also compete for enrollees based on the premiums they
offer. Further, the statutorily defined method for determining the
government’s and enrollees’ shares of premiums results in enrollees
having an incentive to select lower cost plans because they would pay
more for plans with higher premiums. Each year OPM negotiates with
plans to encourage benefit adjustments and other steps to control
premiums. For example, it typically will not allow plans to add new
benefits without a corresponding adjustment to other benefits to offset
the additional costs. In several respects, other major purchasers
follow a different purchasing approach. For example, CalPERS, GM, and
PBGH negotiate with plans based on standardized benefit packages, which
facilitate purchaser and enrollee comparison of costs across plans.
These purchasers then select only some plans and may reject others in
order to offer those they believe offer the best value in terms of
quality and cost. Many large purchasers, facing projections of double-
digit premium increases in the next few years, are shifting more health
care costs to enrollees in an effort to control premium increases. In
addition, some of these purchasers are beginning to explore new
strategies to reduce overall health care costs, such as giving people
more responsibility for their health care spending through innovative
benefit designs that provide enrollees with a set amount of money to
pay health care expenses along with a high-deductible insurance plan.
OPM generally concurred with our findings.
Background:
The federal government has provided health insurance benefits to its
employees through FEHBP since 1960.[Footnote 1] The Congress
established FEHBP primarily to help the government compete with
private-sector employers in attracting and retaining talented and
qualified workers. All active and retired federal workers and their
dependents are eligible to enroll in FEHBP plans, and about 86 percent
of eligible workers and retirees participate in the program. As of July
2002, FEHBP provided health insurance coverage to about 8.3 million
individuals, including 2.2 million active workers, 1.9 million
retirees, and an estimated 4.2 million of their dependents. The
government pays a portion of each enrollee’s health insurance benefit
premium cost. Currently, as set by statute, the government pays 72
percent of the weighted average premium of all health benefit plans
participating in FEHBP, but no more than 75 percent of any plan’s
premium.[Footnote 2] The premiums are intended to cover enrollees’
health care costs, plans’ expenses, reserves, and OPM’s administrative
costs.[Footnote 3] Total FEHBP health insurance premiums paid by the
government and enrollees were about $22 billion in 2001.
The legislative history of the FEHBP statute indicates that the
Congress wanted enrollees to exercise choice among various plan types
and, by using their own judgment, select health plans that best meet
their specific needs.[Footnote 4] The FEHBP statute authorizes OPM to
contract with FFS plans which include the Blue Cross and Blue Shield
(BCBS) service benefit plan and plans sponsored by federal employee and
postal organizations, such as those for the Foreign Service and rural
letter carriers and comprehensive medical plans (commonly known as
HMOs), thereby providing choice to enrollees.[Footnote 5] Some plans
offer two levels of benefits, which provide enrollees with more
options, and some plans also offer a point-of-service (POS) option that
provides an enrollee a choice of using the plan’s health care providers
or, by paying a higher fee, selecting providers outside of the plan’s
provider network.
By statute, OPM is responsible for negotiating contracts with the FFS
plans and HMOs each year.[Footnote 6] Under this authority, OPM can
negotiate these contracts without regard to competitive bidding
requirements.[Footnote 7] Those plans meeting the minimum requirements
specified in the statute and regulations may participate in the program
and their contracts may be automatically renewed each year. However,
plans can choose to terminate their contracts with OPM at the end of
the contract period, and under certain circumstances OPM has the
authority to terminate contracts.[Footnote 8]
As part of its contracting responsibility, OPM negotiates benefits and
premiums with each plan. In April of each year, OPM sends a letter to
all approved and participating FFS plans and HMOs--its annual “call
letter”--to solicit proposed benefit and premium changes for the next
year, which are due by the end of May. The statute does not define a
specific benefit package that must be offered but indicates the core
health care services that plans must cover.[Footnote 9] Each plan
therefore proposes its own benefit package in response to the call
letter. In addition, the plans propose the premiums for these benefits,
which must be provided for two levels of coverage--self-only and self
and family. As a result, each plan’s benefit package and premiums can
differ.
OPM attempts to complete its negotiations by August so that brochures
describing the plans’ benefits and premiums can be ready for the FEHBP
open season that begins in November and lasts about a month. FEHBP’s
brochures, which OPM approves each year, facilitate enrollee plan
comparisons and selections.[Footnote 10] During each open season,
federal workers and retirees are free to switch to other plans for the
next calendar year, regardless of any preexisting health conditions.
Thus, enrollees can determine which plans best meet their needs. OPM
data show that in 2000 and 2001 less than 5 percent of enrollees
switched plans.[Footnote 11]
Thirteen FFS plans participated in FEHBP in 2002. Overall, about 70
percent of federal employees and retirees who participate in FEHBP were
enrolled in FFS plans. Enrollees in these plans can choose their own
physicians and hospitals and the plan reimburses the provider or the
enrollee for the cost of each covered service provided up to a stated
limit. In addition, 11 of the 13 FFS plans had preferred provider
organization (PPO) networks, and by using providers in these networks,
enrollees can spend less in cost-sharing requirements compared to non-
PPO providers.
The FEHBP statute establishes the rate-setting process for FFS plan
premiums.[Footnote 12] FFS plans are experience rated--that is, the
premiums are to be updated each year based on past claims experience
and benefit adjustments. As a result, premiums are designed to cover
the cost of all claims filed for enrollees as well as plan profit and
administrative costs and, therefore, will differ for each FFS
plan.[Footnote 13] In 2002, all active federal workers and retirees
could enroll in the BCBS service benefit plan and in six of the FFS
employee organization plans. (See table 1.) The remaining six FFS
organization plans were available only to members of the sponsoring
organizations.
Table 1: FFS Plans Participating in FEHBP, 2002:
FFS plans open to all: Blue Cross and Blue Shield; Alliance Health
Plan; American Postal Workers Union Health Plan; Government Employees
Hospital Association, Inc.; Mail Handlers; National Association of
Letter Carriers Health Benefits Plan; Postmasters Benefit Plan;:
FFS plans open only to
specific groups: Association Benefit Plan; Foreign Service; Panama
Canal Area; Rural Carrier Benefit Plan; Special Agents Mutual Benefit
Association; Secret Service.
Source: OPM, FEHBP 2002 Guide: Guide to Federal Employees Health
Benefits Plans for Federal Civilian Employees (Washington, D.C.: Nov.
2001).
[End of table]
In 2002, 170 HMOs, located in local markets throughout the country,
participated in FEHBP and accounted for about 30 percent of FEHBP
enrollees.[Footnote 14] HMO enrollees must generally use a plan’s
provider network to obtain services. OPM has established the rate-
setting process for HMOs participating in FEHBP in regulations. For
most HMOs, OPM bases the FEHBP premium rate on the rates paid to the
HMO by the two other employer-sponsored groups with the most similarly
sized enrollments in that community.[Footnote 15] This ensures that
FEHBP obtains a rate that is at least comparable to the lower of the
rates paid by two other similarly sized groups, with adjustments to
account for differences in the demographic characteristics of FEHBP
enrollees and the benefits provided. The number of HMOs available to
federal workers and retirees depends on the area where they live or
work. In 2002, 11 states[Footnote 16] had no HMOs participating in
FEHBP and, in the other states and the District of Columbia, the median
number of HMOs available to federal enrollees was two. Some local
markets had higher HMO participation. For example, the Washington,
D.C., area and southern California had at least four HMOs in which
federal workers and retirees could enroll in 2002.
A few plans accounted for the largest share of FEHBP enrollment. The
largest plan--the BCBS service benefit plan--had about half of the 2002
enrollment. The three largest plans, including BCBS, were all FFS plans
and accounted for almost two-thirds of FEHBP enrollment. About two-
thirds of the 183 participating FFS plans and HMOs enrolled fewer than
5,000 active federal workers and retirees, and slightly less than a
third of all plans enrolled fewer than 1,000 in 2002.
The three other large purchasers we reviewed varied in the extent to
which they provide coverage through HMOs, FFS plans, and PPOs as well
as in the number of plans they offer. GM, the largest private-sector
purchaser of employer-sponsored health insurance, purchased coverage
for about 1.2 million workers, retirees, and their dependents through
81 FFS plans, 31 PPOs, and 136 HMOs in 2002. About 71 percent of the
unionized employees and retirees and about 63 percent of the salaried
employees and retirees were enrolled in FFS plans and PPOs. CalPERS
purchased coverage in 2002 for about 1.2 million active and retired
state and local government public employees and their family members
who obtained coverage through nearly 1,100 local government agencies,
including schools, and the state of California. About 74 percent of
CalPERS enrollees were in 7 HMOs, with the remainder in 2 PPOs and
3 plans covering members of such associations as the association of
highway patrolmen in 2002. PBGH, a California employer coalition,
purchased HMO coverage through its Negotiating Alliance for 19 large
employers. About 350,000 workers, retirees, and dependents were in
PBGH’s 7 HMOs in 2002. This represented about 70 percent of
participants in these employers’ plans. Participating employers made
their own arrangements for non-HMO coverage, primarily through PPOs,
for the remaining employees.
Rise in FEHBP Premiums Has Been Similar to Increases for Other Large
Purchasers:
From 1991 through 2002, health insurance premiums for FEHBP increased
on average 5.9 percent a year compared to 6.4 percent for large
employers--those in the Kaiser/HRET survey with 5,000 or more
employees--and 5.8 percent for CalPERS.[Footnote 17] (See fig. 1.)
FEHBP average premium increases have exceeded 10 percent beginning in
2001, but higher premium increases were partially offset by some plans
reducing benefits--mostly increased enrollee cost sharing--and some
enrollees switching to plans with lower premiums.
Figure 1: Average Annual Change in Premiums, 1991 through 2003:
[See PDF for image]
[A] The 1991 premium increase for large employers includes mid-and
large-
sized firms because the survey did not separately report premiums for
employers with 5,000 or more employees.
[B] In 2001, premium increases for FEHBP were 10.5 percent and for
large employers were
10.8 percent.
[C] In 2002, premium increases for FEHBP were 13.3 percent and for
large employers were
13.0 percent.
[D] The Kaiser/HRET survey data for large employer premium increases
for 2003 were not available at the time of our work.
[End of figure]
Generally, FEHBP premiums increased at a lower rate than premiums for
other large employers and CalPERS during the first half of the last
decade, but increased faster during the second half. For example,
cumulatively from 1991 to 1996, premiums increased on average about
twice as fast for large employers (6.1 percent per year) than for FEHBP
(3.2 percent per year). Premiums for CalPERS also increased faster (5.1
percent per year) on average during this period than for FEHBP.
During the mid-1990s, the rate of change in premiums was negative for
both FEHBP and CalPERS and as a result average premiums declined
temporarily. FEHBP premiums declined on average by about 4 percent in
1995, while CalPERS premiums declined on average from 0.8 to 4 percent
per year from 1995 to 1997.
Cumulatively from 1997 to 2002, FEHBP average premiums grew about
2 percentage points per year faster than those of CalPERS and large
employers--8.6 percent per year compared to 6.5 and 6.7 percent per
year, respectively. Much of the difference in premium increases between
FEHBP and other major purchasers during this period occurred in 1998
and 1999. OPM attributes much of FEHBP’s premium growth in these years
to changes made to the reserve balances maintained by FEHBP plans.
FEHBP’s average premium increase of 13.3 percent in 2002 was similar to
increases for other large purchasers,[Footnote 18] but about 4
percentage points higher than the CalPERS increase.
OPM announced in September 2002 that average premiums would increase by
11.1 percent in 2003 for all FEHBP plans. Premiums for FEHBP’s FFS
plans were expected to increase on average by 10.5 percent, while HMO
premiums were expected to rise an average of 13.6 percent. This
represents the third straight year of double-digit premium increases
for FEHBP, but this increase was less than FEHBP’s average increase in
2002, and less than those many other employers anticipate. While 2003
premiums for many large employers were still being negotiated at the
time of our work, two employee benefit consulting firms reported
preliminary findings from surveys of employee health benefits managers
that anticipated overall premium increases of from 13 to 15 percent,
and average HMO premium increases of 16 percent, for 2003.[Footnote 19]
CalPERS in particular is facing a significant premium increase in 2003.
Premiums for CalPERS’ HMOs--which enroll the bulk of its participants-
-were expected to increase an average of 26 percent in 2003. Premiums
for CalPERS’ two PPOs were expected to increase about 19 and 22
percent.
FEHBP’s premium increases in recent years would have been higher but
for increased cost-sharing requirements for employees and retirees as
well as shifts in enrollment to plans with lower premiums. Over the
last 6 years, FEHBP plans have been required to cover certain new
benefits,[Footnote 20] but plans have also had some offsetting benefit
reductions--mostly increased enrollee cost sharing--thereby resulting
in a net benefit reduction. Like many FEHBP and other large employers’
health plans, from 2000 through 2002, three large FFS plans increased
or introduced cost-sharing features such as copayments or coinsurance
for prescription drugs and physicians as well as deductibles for other
services, as the following examples illustrate.
* BCBS raised its standard option employee copayment for PPO home and
physician visits from $12 to $15, and raised its annual deductible from
$200 to $250 per individual and from $400 to $500 for families. BCBS
also introduced cost sharing for mail-order prescription drugs for
Medicare beneficiaries, which the plan had previously waived.
* The Government Employees Hospital Association, Inc. (GEHA) raised the
copayment for a physician office visit from $10 to $15, and raised
employee coinsurance for non-PPO providers from 20 percent to
25 percent. In addition, GEHA raised its annual deductible from $250 to
$300 per individual and from $500 to $600 for families, and increased
the maximum annual out-of-pocket limit from $4,500 to $5,500.
* Mail Handlers raised the standard option deductible from $200 to $250
per individual, and from $600 to $750 for families.
Enrollees who have shifted to plans with lower premiums have also
reduced FEHBP’s average premium increases. Specifically, OPM’s
actuarial estimates indicate that FEHBP enrollees who switch to plans
offering lower premiums have reduced average premium increases about
1 percent per year since 1997. For 2003, OPM anticipated that this
phenomenon would offset the overall premium increase by about
1.2 percent from what it otherwise would have been. Our analysis shows
that, from 1999 to 2002, more than two-thirds of plans with premium
increases lower than the median FEHBP premium increase gained
enrollment.[Footnote 21]
Increases in Expenditures for Prescription Drugs and Hospital
Outpatient Care Drove Most of Recent Rise in Premiums for FEHBP’s
Largest Plans:
FEHBP premium increases are related to prior years’ increased claims
expenditures, which for the three largest FEHBP plans from 1998 to 2000
were in large part driven by increasing expenditures for prescription
drugs and hospital outpatient care.[Footnote 22] Increasing plan
payments per drug dispensed accounted for most of the increase in
expenditures for drugs, while increasing utilization accounted for the
increase in hospital outpatient care expenditures.[Footnote 23]
Our analysis of 1998 to 2000 claims data for FEHBP’s three largest
plans--all FFS plans--indicate that per-enrollee claims expenditures
increased by about 12.6 percent, including increases of about 8.6
percent from 1998 to 1999, and about 3.7 percent from 1999 to
2000.[Footnote 24] We specifically examined claims expenditures for
these three plans because HMOs typically do not track or report claims
data to OPM and the three plans we reviewed represented about 90
percent of FFS enrollees and about two-thirds of total FEHBP enrollees.
Claims expenditures for prescription drugs and hospital outpatient care
accounted for more than 70 percent of the overall increase in per-
enrollee claims expenditures for these plans from 1998 through 2000,
while hospital inpatient care and physician visits accounted for most
of the remainder. Increases in claims for prescription drugs accounted
for the largest share (47 percent) of the overall increase in claims
expenditures from 1998 to 2000 and increased at the fastest rate during
this period--by nearly one-fourth. (See table 2.)[Footnote 25]
Table 2: Cost Drivers for the Three Largest FEHBP Plans, 1998 to 2000:
Category: Prescription drugs; Per enrollee claims expenditure:
Expenditure (percentage change): 1998: $946; Per enrollee claims
expenditure: Expenditure (percentage change): 1999: $1,156 (22.2%); Per
enrollee claims expenditure: Expenditure (percentage change): 2000:
$1,181 (2.1%); Per enrollee claims expenditure: Expenditure (percentage
change): Increase (percentage
of total) 1998 to 2000: $235 (47.1%); Per enrollee claims expenditure:
Percentage change 1998 to 2000: 24.8.
Category: Hospital outpatient care[A]; Per enrollee claims expenditure:
Expenditure (percentage change): 1998: 706; Per enrollee claims
expenditure: Expenditure (percentage change): 1999: 757 (7.2%); Per
enrollee claims expenditure: Expenditure (percentage change): 2000: 825
(9.0%); Per enrollee claims expenditure: Expenditure (percentage
change): Increase (percentage
of total) 1998 to 2000: 119 (23.8%); Per enrollee claims expenditure:
Percentage change 1998 to 2000: 16.8.
Category: Hospital inpatient care; Per enrollee claims expenditure:
Expenditure (percentage change): 1998: 867; Per enrollee claims
expenditure: Expenditure (percentage change): 1999: 899 (3.6%); Per
enrollee claims expenditure: Expenditure (percentage change): 2000: 924
(2.8%); Per enrollee claims expenditure: Expenditure (percentage
change): Increase (percentage
of total) 1998 to 2000: 57 (11.3%); Per enrollee claims expenditure:
Percentage change 1998 to 2000: 6.5.
Category: Physician visits[B]; Per enrollee claims expenditure:
Expenditure (percentage change): 1998: 461; Per enrollee claims
expenditure: Expenditure (percentage change): 1999: 482 (4.5%); Per
enrollee claims expenditure: Expenditure (percentage change): 2000: 506
(5.0%); Per enrollee claims expenditure: Expenditure (percentage
change): Increase (percentage
of total) 1998 to 2000: 45 (8.9%); Per enrollee claims expenditure:
Percentage change 1998 to 2000: 9.7.
Category: All other[C]; Per enrollee claims expenditure: Expenditure
(percentage change): 1998: 981; Per enrollee claims expenditure:
Expenditure (percentage change): 1999: 1,009 (2.9%); Per enrollee
claims expenditure: Expenditure (percentage change): 2000: 1,025
(1.6%); Per enrollee claims expenditure: Expenditure (percentage
change): Increase (percentage
of total) 1998 to 2000: 44 (8.8%); Per enrollee claims expenditure:
Percentage change 1998 to 2000: 4.5.
Category: Total; Per enrollee claims expenditure: Expenditure
(percentage change): 1998: $3,961; Per enrollee claims expenditure:
Expenditure (percentage change): 1999: $4,303 (8.6%); Per enrollee
claims expenditure: Expenditure (percentage change): 2000: $4,460
(3.7%); Per enrollee claims expenditure: Expenditure (percentage
change): Increase (percentage
of total) 1998 to 2000: $499 (100%); Per enrollee claims expenditure:
Percentage change 1998 to 2000: 12.6.
Source: GAO analysis of OPM claims expenditure data.
Note: Analysis includes FEHBP plan expenditures only, and does not
include expenditures for FEHBP enrollees by other payers (such as
Medicare) and FEHBP enrollees’ cost sharing. The three plans whose
claims expenditures we analyzed represent 90 percent of the enrollment
in all FEHBP FFS plans and almost two-thirds of all FEHBP enrollees.
Numbers may not add to totals due to rounding.
[A] Data for hospital outpatient care are for two of the three plans
because comparable data were not available for all 3 years.
[B] Includes inpatient, outpatient, and out-of-hospital physician
visits, but not surgery or other physician services that the plans
reported to OPM in other categories.
[C] Includes services such as surgery, dental care, laboratory
services, alcohol/substance abuse and mental health treatment, and
other ancillary services.
[End of table]
The increase in per-enrollee claims expenditures for each of these
services represents changes in plan payments per service and
utilization for these categories. Specifically, figure 2 shows that
increasing plan payments per service played the larger role in changing
claims expenditures for prescription drugs, hospital inpatient care,
and physician visits--
66 percent of the $235 increase in expenditures for prescription drugs,
76 percent of the $57 increase for hospital inpatient care, and 93
percent of the $45 increase for physician visits. Utilization increases
accounted for all of the increase in expenditures for hospital
outpatient care and the remainder of the increases for prescription
drugs, hospital inpatient care, and physician visits.
Figure 2: Change in Per-Enrollee Claims Expenditures due to Plan
Payments and Utilization for Major Categories of Health Care Services
for the Three Largest FEHBP Plans, 1998 to 2000:
[See PDF for image]
[End of figure]
Note: The three plans included in this analysis represented 90 percent
of the enrollment in all FEHBP FFS plans and almost two-thirds of all
FEHBP enrollees. Data for hospital outpatient care are for two of the
three plans, because comparable data were not available for the third
plan for all 3 years.
Aging FEHBP enrollees and the changing health care market may have
contributed to increasing plan payments and utilization. Increased
utilization was in part associated with FEHBP’s aging enrollee
population. OPM actuaries estimate that a 1-year increase in the
average age of the FEHBP population translates into almost a 3.3
percent increase in total health costs. From 1998 through 2000, the
average age of FEHBP enrollees increased by about half a year, from
61.6 years to 62.1 years. Recently, higher payments have also resulted
from providers’ negotiations with managed care plans. In the early and
mid-1990s, managed care plans were able to extract significant
discounts from providers that they included in their networks. However,
in recent years studies have indicated that providers have secured
higher payments in part due to consolidations--particularly among
hospitals in some major metropolitan areas--that may have increased
their market power.[Footnote 26] In addition, there is some evidence in
these studies that physicians are demanding and receiving higher fees.
OPM’s Reliance on Competition among Plans and Annual Negotiations to
Contain Premium Increases Differs in Some Ways from Other Large
Purchasers:
Consistent with the design of FEHBP, which encourages enrollee choice,
OPM relies on competition among plans and its annual negotiations with
participating plans to moderate FEHBP plans’ premium increases. To
maximize enrollees’ choices among plans, OPM contracts with all plans
meeting minimum standards and allows plans to propose varying benefit
designs. In its annual negotiations with the plans, OPM suggests
various cost containment strategies for plans to consider as they
prepare their benefit and premium proposals, and for 2003 placed more
emphasis on encouraging the plans to propose approaches to control cost
increases. Other major purchasers, such as CalPERS, PBGH, and GM, adopt
different approaches in developing their health benefit offerings such
as negotiating based on a standardized benefit package and contracting
only with plans with which they reach a satisfactory agreement. As
large purchasers face escalating premiums, they continue to look for
new ways to help control costs, including offering plans that make
enrollees more sensitive to the costs of health care by giving them
more control over their health care spending, charging enrollees more
when they go to higher cost hospitals, or focusing more attention on
managing chronic health care conditions.
FEHBP Encourages Enrollee Choice and Competition for Enrollment among
Plans:
OPM contracts with all plans meeting certain standards and
requirements. As long as plans continue to meet the minimum standards,
OPM does not exclude them from the program. Although the statute gives
OPM the authority to remove plans from FEHBP under certain
circumstances, OPM officials said that they have not recently exercised
this authority primarily because they wanted to maximize enrollee
choice and minimize enrollee disruption, especially in less populated
areas of the country.[Footnote 27]
While FFS plans and HMOs do not have to compete against one another to
participate in FEHBP, they do have to compete with other plans to
attract enrollees. One way plans compete is by the benefits they offer.
Since the FEHBP statute does not define a specific benefit package, but
rather requires plans to offer a core set of benefits, plans propose
the benefits they will offer to remain competitive within their own
market areas, whether national or local. Each year, OPM negotiates each
plan’s benefits package, ensuring that the costs for any new benefits
proposed by the plan are offset by reductions in other benefits.
Plans also compete for enrollees based on their premiums. By statute,
premiums must “reasonably and equitably” reflect the cost of the
benefits provided by the different plan types participating in
FEHBP.[Footnote 28] Premiums for FFS plans are experience rated. Over
time, their premiums approximately equal average service expenditures,
administrative costs, and profits. If OPM and the plans set premiums
too high or too low in one year, OPM makes appropriate adjustments to
premiums and reserve balances in subsequent years. To set FEHBP premium
rates for the HMOs, OPM relies on the negotiations that these plans
conduct with two similarly sized purchasers in each market, requiring
FEHBP to receive the lower of the two rates. OPM’s Office of the
Inspector General conducts periodic audits to assure the validity of
these rates.[Footnote 29]
The government’s method for setting premium contributions provides
plans an incentive to price their products competitively since
enrollees pay less for lower cost plans and pay the entire cost
exceeding the maximum government share.[Footnote 30] For example, for a
plan with a self-only premium of $3,200 per year, the enrollee would
pay $800 and the government would pay the other 75 percent ($2,400).
For a plan costing $3,400, the enrollee would pay $856 while the
government would pay the maximum $2,544. For any plan costing more, the
enrollee would have to pay the entire additional cost--a plan costing
$3,600, for example, would require a $1,056 annual premium from the
enrollee while the government share would remain at $2,544. Few plans
have premiums much higher than the amount where the enrollee would
receive the maximum government share: Only 19 of the 183 plans in 2002
had premiums more than 10 percent above $3,392 (the premium equivalent
to the maximum government share of $2,544), while 97 had premiums at
least 10 percent below this amount.
OPM Uses Annual Negotiations with Plans to Help Moderate Premium
Increases:
Each year, OPM’s “call letter” provides its negotiation objectives and
calls for the plans’ new benefit and premium proposals. OPM uses its
annual letter to give guidance regarding the goals to be achieved and
the types of cost containment efforts plans may want to consider to
help contain premium increases. OPM encourages plans to consider
implementing cost containment strategies each year as they draft their
FEHBP benefit and premium proposals.
During negotiations over benefits and premiums, OPM tends to focus its
cost containment efforts on plans that submit proposals with the
highest premium increases or those that are outliers in some other way.
To some degree, OPM relies on the competitive nature of the program to
achieve results in that each plan must weigh the potential effect of
its benefit offerings and premiums on its market share. Changes in
benefits, and any resulting premium changes, can affect a plan’s
enrollment, but there is a trade-off since increased benefits may be
attractive to potential enrollees while the associated increased
premium may deter enrollment.
OPM has encouraged plans to consider several strategies to help
moderate premium increases. For example, for contract year 1998, OPM
encouraged FFS plans to expand and strengthen their existing PPO
arrangements by obtaining discounts when cost effective. For that year,
it also encouraged all plans to consider proposing a point-of-service
(POS) product. OPM’s call letter stated that POS products were an
effective way to introduce enrollees to the concept of managed health
care. For contract years 2001 and 2002, OPM’s call letters encouraged
ways to control rising prescription drug costs including use of drug
formularies and three-tier drug benefits--that is, lower cost sharing
for generic and brand name drugs on a plan’s formulary than for drugs
not included on the formulary.[Footnote 31]
Even more than in past years, OPM’s latest call letter for contract
year 2003 challenged plans to identify ways to reduce premium
increases. OPM asked plans to propose innovative ideas to help contain
these increases.[Footnote 32] For 2003, OPM also encouraged plans to
consider several specific cost containment strategies including
increasing enrollees’ out-of-pocket costs, reemphasizing the need to
manage prescription drug costs, and putting more emphasis on care
management for enrollees who have chronic conditions. In addition, the
call letter told plans to expect very tough negotiations, a specific
direction OPM did not include in past letters.
On September 17, 2002, OPM announced that FEHBP premiums would increase
by an average of about 11.1 percent for 2003, about 2 percentage points
less than in 2002. In addition, OPM officials indicated that, while
some individual plans increased or decreased benefits, overall benefit
levels would be largely similar to those available in 2002. OPM
officials reported that the initial proposals submitted by the plans
would have resulted in a 13.4 percent increase for 2003. Following
negotiations with OPM on benefits and premiums, the average increase
was reduced to
12.4 percent. OPM officials anticipated that the remaining savings from
the initial proposals would result from FEHBP enrollees switching to
lower cost plans during the open enrollment season.
Other Large Purchasers Use Different Approaches in Negotiations and
Cost Containment:
Whereas OPM contracts with all plans meeting minimum standards and
negotiates benefit packages that can vary with each plan, other large
purchasers we reviewed follow a different approach. CalPERS, GM, and
PBGH conduct negotiations based on a standardized benefit package. At
the end of the negotiations, these purchasers can decide not to
contract with a plan that does not meet their standards in such areas
as cost or quality. Some of these purchasers also reward enrollees by
paying more of the premiums when enrollees choose plans the purchasers
consider to be the best value. Continuing premium increases have caused
these and many other large purchasers to search for ways to reduce
their premium costs. While many purchasers first look to shift more of
the costs to their employees by taking such actions as increasing plan
deductibles, some are also exploring new strategies to help contain
these increases.
Three Other Large Purchasers Offer Standardized Benefits, Facilitating
Comparisons for Purchasers and Enrollees, and May Not Contract with All
Plans:
The three large purchasers we reviewed rely on a standardized benefits
package when conducting negotiations, particularly in negotiations with
HMOs. CalPERS standardized benefits and copayments across its HMOs in
1993 to be able to better assess differences in plans’ costs, and GM
also negotiates with HMOs using a standardized benefits package. PBGH,
in conjunction with other national purchasers, developed an annual
request for proposals that it uses for its standardized HMO benefit
package.[Footnote 33]
Along with using standardized benefit packages, some large purchasers
exclude plans if they cannot negotiate a satisfactory agreement with
them. During its negotiations for benefit year 2002, for example,
CalPERS rejected bids from all participating HMOs as too high and then
allowed them to resubmit revised bids. CalPERS rejected the bids
because the proposed increases were twice as high as those that
occurred in the past
5 years and were considerably higher than what CalPERS had expected.
CalPERS ultimately dropped 3 of its 10 HMOs at the end of its
negotiations that year. For benefit year 2003, CalPERS dropped 2 of the
remaining
7 HMOs at the end of its negotiations to help control premium increases
and to provide the best value for those premiums. GM reviews and scores
HMOs on the basis on quality and cost. Plans scoring relatively low
will either be dropped or be given a year to improve.
Like FEHBP, some other large purchasers vary the premiums some
employees pay to encourage enrollment in certain plans.[Footnote 34]
For example, as part of its value purchasing strategy, which the
company started in 1997, GM evaluates HMOs for quality and value and
encourages salaried employees to enroll in those plans it rates as
higher value plans. For salaried employees, GM covers a larger share of
the premiums for HMOs designated as higher value.[Footnote 35] GM
estimates that it saves about $4.6 million annually by having its
salaried employees move into HMOs designated as higher value and that
these employees save about $2 million in premiums.[Footnote 36] Also,
PBGH states that it focuses its purchasing efforts on plans it has
identified as high quality and some employers participating in the
group support PBGH’s effort by setting their premium contributions to
encourage employee enrollment in plans considered to be high
value.[Footnote 37]
Some Large Purchasers Consider New Strategies to Control Rising
Premiums:
Over the next several years, analysts predict that double-digit health
insurance premium increases will continue.[Footnote 38] As a result,
many large purchasers are searching for ways to slow this growth.
Shifting more of the costs to employees is one of the first cost
containment strategies employers consider as premium rates escalate. In
particular, many of the largest employers have increased deductibles
for PPO plans. For example, employer survey data show that the average
annual deductible for self-only in-network PPO coverage increased from
$175 in 1999 to $310 in 2002, while out-of-network deductibles
increased from $272 in 1999 to $529 in 2002.[Footnote 39] Similarly,
very large employers are increasingly using multiple-tier cost sharing
for prescription drugs as a cost containment strategy. According to
another employer survey, 22 percent of PPOs had a three-tier drug
copayment in 2000, but the number increased to 40 percent in
2001.[Footnote 40]
Some large purchasers, including OPM and those we reviewed, are
beginning to explore new strategies to help reduce escalating costs.
For example, some are in the early stages of considering “consumer-
driven” plans that provide employees with more financial incentives to
be sensitive to health care costs and more control over their health
care spending decisions. As this concept covers a wide range of
possible approaches, there is no single definition. However, all
approaches tend to shift more decision-making responsibility regarding
health care from employers to employees. For example, they could
provide employees with a personal spending account, which the employer
would fund at different levels. One plan funds these accounts at $1,000
for an individual or at $2,000 for a family. Employees could use this
money to pay medical expenses. If employees spend all the money in
their accounts, they would have to spend their own money until a
deductible amount--which for one plan was $600 for an individual
employee and $1,200 for a family--is met. Then, coverage through an
insurance policy purchased by the employer would begin. In some
approaches, employees who do not spend all the money in their accounts
could carry the money over from year to year. To date, as these plans
are so new, few people are enrolled--several studies have estimated
that fewer than 1 percent of enrollees with employer-sponsored health
insurance are in some form of consumer-driven health plans.[Footnote
41]
Other new strategies that some purchasers are considering include plans
that contain provisions to help reduce hospital costs and costs for
enrollees with chronic conditions. For example, CalPERS and PBGH are
exploring the use of financial incentives for enrollees when choosing
from which hospital to receive care. Such plans are now becoming
available but represent a very small share of the market. These plans
offer tiered copayments for enrollees that are lower for hospitals that
offer the best rates and are higher for those that are more expensive.
Another approach attracting attention among many large employers is
disease management, which focuses attention on chronic illnesses such
as asthma, diabetes, and heart disease that generate a large amount of
health care expenditures. For example, CalPERS, PBGH, and GM are all
actively involved in pursuing disease management programs. Also, in its
call letter for contract year 2003, OPM encouraged FEHBP plans to
consider using disease management programs. However, according to one
employer survey, many purchasers said that disease management programs
are too new and data are not yet available to assess the benefits
compared to the costs.
Comments from OPM and Other Reviewers:
We provided a draft of this report to OPM, CalPERS, GM, and PBGH for
their review. OPM generally concurred with our study findings,
highlighting its negotiating strategy as contributing to average FEHBP
premiums for 2003 being below national trends. OPM also indicated that
in the coming year it will strengthen its efforts by adding enhanced
consumer education to provide enrollees with additional information for
making informed choices. CalPERS and GM also concurred with our
findings. PBGH, along with OPM and CalPERS, provided technical
comments, which we incorporated as appropriate. (App. II contains the
full text of OPM’s comments.):
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. We will then send copies to the Director of OPM, other
interested parties, and appropriate congressional committees. We will
also make copies available to others on request. In addition, this
report will be available at no charge on GAO’s Web site at http://
www.gao.gov.
Please call me at (202) 512-7118 or John Dicken at (202) 512-7043 if
you have any additional questions. N. Rotimi Adebonojo and Joseph Petko
were major contributors to this report.
Kathryn G. Allen
Director, Health Care--Medicaid and Private Health Insurance Issues:
Signed by Kathryn G. Allen
[End of section]
Appendix I: Methodology:
To compare premium trends for the Federal Employees Health Benefits
Program (FEHBP) and other large purchasers over the last decade, we
obtained data from the Office of Personnel Management (OPM), the
California Public Employees’ Retirement System (CalPERS), and surveys
of private employer-sponsored health benefits conducted by the Kaiser
Family Foundation and the Health Research and Educational Trust
(Kaiser/HRET).[Footnote 42]
To identify factors driving FEHBP’s recent premium growth, we analyzed
several OPM data sources, including summary reports it received from
the three largest nationwide plans on enrollees’ health care service
utilization and related plan payments for 1998 through 2000. These
three plans are all fee-for-service (FFS) plans and accounted for 90
percent of FEHBP enrollment in FFS plans and almost two-thirds of the
total FEHBP enrollment.[Footnote 43] We analyzed expenditure and
utilization data for services, including hospital inpatient care,
hospital outpatient care, physician visits, prescription drugs,
laboratory services, surgery, and mental health and substance
abuse[Footnote 44] for 1998 through 2000 for the three largest
plans.[Footnote 45] These summary data are submitted to OPM by each FFS
experience-rated plan, reporting utilization and expenditures incurred
by the plan in a calendar year and paid in that calendar year and
through the first 9 months of the next calendar year. Because each plan
reports its data to OPM slightly differently, we aggregated
expenditures and utilization for multiple:
categories of services, including hospital inpatient,[Footnote 46]
hospital outpatient,[Footnote 47] prescription drugs, and physician
visits--and all other services. We adjusted each plan’s expenditures by
enrollment as reported by the plans to OPM to calculate per-enrollee
expenditure and utilization, and calculated a payment per unit for each
category of service. We weighted the expenditure and utilization for
the three plans by their respective enrollments for each year from 1998
to 2000. We calculated the increase in per-enrollee claims expenditure
attributable to increased plan payments from 1998 through 2000 using
the change in plan payments over the
3 years and assuming utilization remained steady at the 1998 level.
Similarly, we calculated the increase in per-enrollee claims attributed
to increased utilization using the change in utilization from 1998 to
2000 and assuming plan payments were constant at the 2000 level.
In addition, using OPM’s data for all FEHBP plans, we compared each
plan’s premium and enrollment changes from 1999 through 2002. We could
only do this analysis for those plans that participated in FEHBP in
each of the comparison years--for example, in both 2001 and 2002. We
identified how many plans with premium changes less than and greater
than the median premium gained and lost enrollment. These counts do not
include plans that dropped out of FEHBP because we do not know what
type of premium and enrollment changes these plans would have
experienced in the following year.[Footnote 48] We also reviewed the
literature and interviewed OPM officials and actuaries at the Hay
Group, Hewitt Associates LLC, and William M. Mercer, Inc.
To examine the steps OPM takes to control FEHBP costs, we interviewed
officials in OPM’s Office of Insurance Programs and Office of the
Actuary. To obtain the plans’ perspectives, we interviewed officials at
the Blue Cross Blue Shield Association[Footnote 49] and at Kaiser
Permanente--two large plans participating in FEHBP. We also interviewed
representatives from two federal employee unions--the American
Federation of Government Employees and the National Treasury Employees
Union.
To examine how other large purchasers negotiate health benefits and
attempt to control costs, we reviewed the literature and employee
benefit surveys; interviewed employee benefit consultants; and
interviewed officials of three large purchasers of employer-sponsored
health insurance, including CalPERS--the largest public purchaser of
health insurance after the federal government, Pacific Business Group
on Health (PBGH)--a California-based purchaser representing 19 large
employers, and General Motors (GM)--the largest private purchaser of
employer-sponsored health benefits. See table 3 for selected
characteristics of FEHBP and the other large group purchasers.
Table 3: Selected Characteristics of FEHBP Compared to Health Benefit
Programs Offered through CalPERS, PBGH, and GM:
Characteristics: Enrollment for 2002; FEHBP: About 8.3 million active
workers, retirees, and dependents; CalPERS: About 1.2 million active
workers, retirees, and dependents; PBGH: About 350,000 active workers,
retirees, and dependents; GM: About 1.2 million active workers,
retirees, and dependents.
Characteristics: Coverage areas; FEHBP: Nationwide and outside the
country; CalPERS: Primarily California; PBGH: Primarily California; GM:
Nationwide and outside the country.
Characteristics: Enrollment by plan type; FEHBP: 70% FFS/PPO; 30% HMO;
CalPERS: 23% PPO; 74% HMO; 3% association plans; PBGH: 100% HMO[A]; GM:
Hourly workers:; 71% FFS/PPO; 29% HMO; Salaried workers:; 63% FFS/PPO;
37% HMO.
Characteristics: Number of plans for 2002; FEHBP: 7 FFS plans available
to all, 6 FFS plans open to specific groups, and 170 HMOs[B]; CalPERS:
2 PPOs available to all, 7 HMOs, 2 association HMOs, and 1 association
PPO; PBGH: 7 HMOs; GM: 81 FFS; 31 PPOs; 136 HMOs.
Characteristics: Participating employers; FEHBP: Civilian federal
agencies; CalPERS: 1,099 California public sector agencies; PBGH: 19
California private sector companies; GM: GM.
Source: GAO analysis of information from FEHBP, CalPERS, PBGH, and GM.
[A] PBGH negotiates HMO but not other types of coverage for
participating employers. Therefore, the 350,000 active workers,
retirees, and dependents covered through PBGH are all in HMOs. However,
this represents about 70 percent of participants in these employers’
health plans. The remainder are primarily in PPOs offered directly by
the employers.
[B] To arrive at the number of FEHBP plans, we used data OPM provided
on plan enrollment. We counted the number of FFS plans and HMOs as
indicated by OPM’s plan codes. If a plan had two benefit options, we
counted this as one plan. Starting in 2002, BCBS was listed under two
separate codes (one for the service benefit plan and one for the basic
plan). We counted this as one FFS plan to be consistent with our counts
for the previous years.
[End of table]
[End of section]
Appendix II: Comments from the Office of Personnel Management:
OFFICE OF THE DIRECTOR:
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT WASHINGTON, DC 20415-1000:
DEC 13 2002:
Ms. Kathryn G. Allen:
Director, Health Care --Medicaid And Private Health Insurance Issues
U.S. General Accounting Office Washington, D.C. 20548:
Dear Ms. Allen:
Thank you for the opportunity to comment on your draft report, FEDERAL
EMPLOYEES’ HEALTH BENEFITS: Premium Increases Similar To Major
Purchasers (GAO-03-236).
We are pleased to see that The General Accounting Office (GAO) has
determined that, over time, the Federal Employees Health Benefits
Program (FEHB) premium trends are generally in line with those of other
large purchasers. We are especially pleased that this year, the first
full year I have been the Director, overall average FEHB premium
increases are 11.1 %, well below national trends. Earlier this year,
concerned about potential cost increases, I initiated a fourpoint
strategy: 1) ask FEHB health plans to come to us with their best,
innovative benefit proposals; 2) tell the Office of Personnel
Management’s (OPM) negotiating team that I would stand behind tough
negotiations; 3) order a study on the cost of benefit mandates; and 4)
join with the Office of Personnel Management’s Inspector General in
strengthening our alliance to fight fraud and abuse. We believe the
results this year speak for themselves.
In the coming year, I will strengthen those efforts with the addition
of greatly enhanced consumer education. OPM will work internally and
with the health plans to make sure that the consumers we serve have the
information they need when they need it, that they understand it, and
that they make choices based upon it. The payoff for this effort will
be enhanced quality, more appropriate utilization of services, and
adoption of healthy lifestyles and health care choices that will
preserve and enhance the health status of Federal employees, retirees,
and their families.
The President’s health care agenda calls for patient-centered health
care, preservation of choice and excellent quality. OPM’s reliance on
our private sector partnerships with health plans is fundamental. FEHB
health plans offer the benefits that they believe their current
enrollees want and that also would be attractive to prospective
enrollees. FEHB consumers are price sensitive, so health plans make
efforts to offer their benefit packages at affordable prices. OPM’s
role as:
Ms. Kathryn G. Allen2:
purchaser is to balance our consumers’ expectations of comprehensive
benefits with the cost implications and marketplace realities. We
believe our traditional private-sector partnerships have allowed us to
deliver a competitive health benefits program.
The GAO report demonstrates the power of programs such as the FEHB that
are market-driven. Insurance industry practices that work in the
private sector arise naturally in the FEHB Program. Given the
importance that health care benefits play in the federal government’s
ability to recruit and retain the workforce we need to deliver results
for the American people, we need the most attractive health benefits
package possible. FEHB has long been considered a model of consumer
choice and customer satisfaction and it is a program that we are
committed to keep on the cutting edge of employer-provided health
benefits.
We appreciate the opportunity to comment. We are also providing some
technical comments on the draft GAO report as an attachment.
Thank you.
Sincerely,
Kay Coles James,
Director:
Signed by Kay Coles James
Enclosure:
[End of section]
FOOTNOTES
[1] FEHBP was established by the Federal Employees Health Benefits Act
of 1959,
Pub. L. No. 86-382, 73 Stat. 708. The act, as amended, is codified at 5
U.S.C. §§ 8901 et seq. Unless otherwise noted, our reference to the
statute throughout this report refers to these sections of the U.S.
Code. The law became effective on July 1, 1960. Before FEHBP was
established, federal employee unions and organizations had established
their own health plans to provide group coverage to their members. When
the Congress established FEHBP, it allowed these plans to be included
in the program and to compete for enrollees.
[2] The Balanced Budget Act of 1997 established the government’s
current share of the premiums effective in 1999. Pub. L. No. 105-33, §
7002, 111 Stat. 251, 662 (amending
5 U.S.C. § 8906). OPM determines separate averages for self-only and
for self and family enrollments.
[3] The premiums paid by employees, retirees, and the government are
held in the Employees Health Benefits Fund. The FEHBP statute requires
that an amount not to exceed 3 percent of the contributions made to
this fund for each health benefit plan participating in FEHBP must be
set aside in contingency reserves. Contingency reserve funds are placed
in special reserve accounts for each plan. The contingency reserve for
FFS plans is set to cover about 2 months of claims and these plans can
use the money to fund claim expenses that were larger than expected or
offset future premium increases. OPM uses the HMOs’ reserves to adjust
payments to them. An additional amount, not to exceed 1 percent of
premiums, is set aside to cover OPM’s administrative costs.
[4] See House Committee on Post Office and Civil Service, H.R. Rep. No.
86-957, at 3-4 (1959).
[5] The statute also provided for one indemnity benefit plan. The only
such plan withdrew from FEHBP in 1990 and has not been replaced. The
House Committee report accompanying this provision indicated that the
indemnity plan was to make payments for medical services to either the
service provider or directly to the enrollee, whereas the service
benefit plan, where possible, was to make payments to the provider.
[6] 5 U.S.C. § 8902.
[7] Each year, HMOs can submit applications to participate in FEHBP
without having to respond to a specific request for proposals. The
statute limits the participation of FFS plans in FEHBP to one service
benefit plan, one indemnity plan, and certain employee organization
plans and thereby limits entry of new FFS plans.
[8] OPM can terminate a plan’s contract at the end of its term if fewer
than 300 federal employees and retirees were enrolled during the two
preceding contract terms. In addition, if a plan fails to meet program
requirements, OPM can withdraw its approval after giving the plan
notice and providing an opportunity to have a hearing.
[9] For example, the service benefit plan--BCBS--must include hospital,
surgical, in-hospital medical, ambulatory patient, supplemental, and
obstetrical benefits. An indemnity benefit plan would have to provide
hospital care; surgical care and treatment; medical care and treatment;
obstetrical benefits; prescribed drugs, medicines, and prosthetic
devices; and other medical supplies and services. Employee organization
plans and HMOs must provide the same types of benefits as the service
benefit or indemnity plans, or both. The core benefits that plans must
provide have been expanded over time by federal laws and executive
orders.
[10] In testimonies commenting on information provided to Medicare
beneficiaries, we have identified OPM as a model in how it presents
information to facilitate plan comparison and choice. See, for example,
U.S. General Accounting Office, Medicare+Choice: HCFA Actions Could
Improve Plan Benefit and Appeal Information, GAO/T-HEHS-99-108
(Washington, D.C.: Apr. 13, 1999).
[11] In addition, about 2 percent of enrollees were newly enrolled in
or disenrolled from FEHBP.
[12] 5 U.S.C. § 8902(i).
[13] OPM negotiates the profit amount (also called the service charge)
with each FFS plan. When negotiating the profit amount, OPM considers
such factors as the contractor’s performance, cost control, and risk.
While OPM does not guarantee a minimum profit, its negotiating
objective is that a plan’s profit may not exceed 1.1 percent of the
projected incurred claims and administrative costs.
[14] The total number of participating HMOs has declined over time.
From 2000 through 2002, while the number of FFS plans remained
constant, the total number of HMOs participating in FEHBP declined from
276 to 170 as HMOs have either withdrawn from the program or have
merged with other plans. See U.S. General Accounting Office, Federal
Employees’ Health Program: Reasons Why HMOs Withdrew in 1999 and 2000,
GAO/GGD-00-100 (Washington, D.C.: May 2, 2000).
[15] As most HMOs are paid on a per-person basis rather than for each
service they provide, few have enough experience with paying claims or
have the claims data needed to be paid on a FFS basis. Eighteen FEHBP
HMOs are experience rated in the same way as the FFS plans. Premiums
are based on the claims expenditures for FEHBP enrollees for past years
along with amounts to cover profit and administrative costs.
[16] The 11 states were Alaska, Arkansas, Delaware, Idaho, Maine,
Mississippi, Montana, Nebraska, New Hampshire, South Carolina, and West
Virginia.
[17] By comparison, annual spending for Medicare increased, on average,
by 7.5 percent annually (from $109.7 billion in 1990 to $242.4 billion
in 2001).
[18] The Kaiser/HRET survey found that premiums for large employers
increased by about
13 percent in 2002. See the Kaiser Family Foundation/HRET, Employer
Health Benefits 2002 Annual Survey (Menlo Park, Calif.: 2002).
[19] See Hewitt Associates, “Health Care Cost Increases Expected to
Continue Double-Digit Pace in 2003,” http://www.hewitt.com/hewitt/
resource/newsroom/pressrel/2002/10-14-02.htm (downloaded Nov. 4,
2002), and Towers Perrin, “Towers Perrin Forecasts 15% Increase In
Health Care Costs--Highest Percentage Increase in More Than a Decade,”
http://www.towers.com/towers_news/news/PressRelease_2002/pr100202.htm
(downloaded Nov. 4, 2002).
[20] Since the late 1990s, federal law or executive orders have
required coverage for several benefits by FEHBP plans, including
certain prescription drugs, nonexperimental bone marrow transplants,
mammography screening, minimum benefits for childbirth and
mastectomies, and parity between specified aspects of mental health and
substance abuse benefits and medical and surgical benefits.
[21] Specifically, of the 88 FEHBP plans whose premium changes from
2001 to 2002 were less than the median premium increase, 67 gained
enrollment and 21 lost enrollment. Similarly, of the 109 plans with
premium changes less than the median from 2000 to 2001, 74 gained
enrollment and 35 lost enrollment; and of the 138 plans with premium
changes less than the median from 1999 to 2000, 91 gained enrollment
and 47 lost enrollment. Some of the observed changes in enrollment may
be due to individuals leaving or entering FEHBP plans for reasons other
than cost, such as individuals entering or leaving employment with the
federal government.
[22] Our analysis is based on claims expenditures paid by FEHBP plans,
and excludes expenditures paid for FEHBP enrollees by Medicare and
other payers, and FEHBP enrollees’ cost sharing. Data for hospital
outpatient care are for two of the three plans because comparable data
were not available for the third plan.
[23] We derived plan payments per service from the cost per unit of
each category of care, such as the payment per prescription drug
dispensed, outpatient hospital case, inpatient hospital day, or
physician visit.
[24] Claims expenditures are one of the key components OPM and FEHBP’s
experience-rated plans evaluate in negotiating premiums. However, there
is a lag between changes in claims and premiums because future premiums
are based on actuarial projections estimated from past claims. In 1999,
the average increases in premiums and claims expenditures for the three
plans were similar, while in 2000, the average increase in premiums was
more than double the average increase in claims expenditures.
[25] While prescription drugs are the primary driver of claims
expenditures for FEHBP plans, two studies have shown that increasing
inpatient hospital expenditures have represented a larger share of
overall increases in health care expenditures. For example, see
Bradley C. Strunk, Paul B. Ginsberg, and Jon R. Gabel, “Tracking Health
Care Costs,” Health Affairs (Web Exclusive) (Bethesda, Md.: Sept. 26,
2001), http://www.healthaffairs.org/WebExclusives/
Strunk_Web_Excl_92601.htm (downloaded Nov. 4, 2002). FEHBP plans’
claims expenditures may not be as sensitive to inpatient hospital
expenditures because a large portion of these hospital costs is paid by
Medicare for FEHBP enrollees who are Medicare-eligible.
[26] For example, see Bradley C. Strunk, Paul B. Ginsberg, and Jon R.
Gabel, “Tracking Health Care Costs,” Health Affairs (Web Exclusive),
and William M. Mercer, Incorporated, Mercer/Foster Higgins National
Survey of Employer-Sponsored Health Plans 2001 (New York, N.Y.: 2002).
[27] OPM can withdraw its approval of a contract if a plan fails to
meet the minimum eligibility requirements, but only after providing its
reason for doing so and giving the plan an opportunity for a hearing.
In addition, the statute gives OPM the authority to terminate a
contract if during the preceding 2 contract years the plan did not have
300 or more federal workers or retirees enrolled. In 2002, OPM data
show that 24 participating HMOs had fewer than 300 active workers and
retirees enrolled.
[28] 5 U.S.C. § 8902(i).
[29] According to OPM officials, in the past one of the most common
findings of these audits was that the plans selected for comparison
were not similarly sized groups. For example, one plan recently agreed
to pay over $87 million--a record amount--to settle allegations that it
charged FEHBP higher rates than its commercial customers.
[30] Under the statute, the government generally pays 72 percent of the
weighted average premium of all plans, but no more than 75 percent of
any plan’s premium. In 2002, the maximum government share of the
premium was $2,544 for self-only coverage and $5,809 for self and
family coverage. In addition, the Postal Service pays a higher share of
Postal Service employees’ premiums. In 2002, it paid 85 percent of the
weighted average premium but no more than 88.75 percent of any plan’s
premium.
[31] A plan’s formulary is a list of drugs that physicians and
enrollees are encouraged to use.
[32] In response to OPM’s request for innovative ideas, one FEHBP plan
is offering a new “consumer-driven” option in 2003. Under this option,
enrollees will receive a personal spending account of $1,000 for single
coverage and $2,000 for family coverage to be used to cover health care
expenses. Enrollees exhausting this spending account must pay an out-
of-pocket deductible of $600 for single coverage or $1,200 for family
coverage before insurance coverage begins.
[33] PBGH also has HMOs bid on several benefit modifiers and adjusters
in addition to the standardized benefit package. For example, HMOs bid
on pharmacy benefits with both two-tiers and three-tiers of cost
sharing. Participating employers can decide which level they want to
include in their benefit packages.
[34] CalPERS allows participating employers to determine how much to
contribute toward their employees’ premiums.
[35] GM’s value purchasing strategy does not apply to unionized
workers, who represent
74 percent of active GM workers enrolled in health benefit plans and
whose benefits and premiums are negotiated through collective
bargaining agreements.
[36] In 2001, GM paid about $235 million in HMO premiums for salaried
employees.
[37] However, GM and PBGH’s approaches may not be widespread; most
large employers do not set contributions to encourage their employees
to use higher value plans.
See James Maxwell, et al, “Corporate Health Care Purchasing Among
Fortune 500 Firms,” Health Affairs (May/June 2001).
[38] For example, see Jon Gabel, et al, “Job-Based Health Benefits In
2002: Some Important Trends,” Health Affairs (September/October 2002)
and William M. Mercer, Incorporated, Mercer/Foster Higgins National
Survey of Employer-Sponsored Health Plans 2001 (2002).
[39] See the Kaiser Family Foundation/HRET, Employer Health Benefits
2002 Annual Survey (2002) and Employer Health Benefits 1999 Annual
Survey (1999).
[40] See William M. Mercer, Incorporated, Mercer/Foster Higgins
National Survey of Employer-Sponsored Health Plans 2001 (2002) and
Mercer/Foster Higgins National Survey of Employer-Sponsored Health
Plans 2000 (2001).
[41] For example, see Jon R. Gabel, Anthony T. Lo Sasso, and Thomas
Rice, “Consumer-Driven Health Plans: Are They More Than Talk Now?”
Health Affairs (Web Exclusive) (Bethesda, Md.: Nov. 20, 2002), http://
www.healthaffairs.org/WebExclusives/Gabel_Web_Excl_112002.htm
(downloaded Nov. 22, 2002), and Mercer Human Resource Consulting, “Are
Consumer-Directed Health Plans Good Medicine?” http://
www.mercerhr.com/knowledgecenter/reportsummary.jhtml?idContent=1068735
(downloaded Nov. 22, 2002).
[42] Kaiser/HRET has been conducting surveys of private employer-
sponsored health benefits since 1999. These surveys capture data from
employers ranging in size from 3 workers to 300,000 or more workers. In
earlier years, KPMG Peat Marwick conducted the surveys.
[43] Generally, federal workers and retirees can enroll in two types of
health care plans--FFS plans and health maintenance organizations
(HMO).
[44] One plan did not provide a separate breakout of utilization and
expenditures for mental health and substance abuse.
[45] We requested data for several years prior to 1998, but these data
were available for only one of the three plans. Data since 2000 were
not available from OPM at the time of our analysis.
[46] One of the plans we analyzed changed the way it reported inpatient
data from 1998 to 1999. Utilization for maternity services was included
with inpatient services data reported to OPM for 1998 for this plan,
but was reported separately in 1999 and 2000. To be consistent across
years, we added these expenditures and utilization to the plan’s
inpatient data for 1999 and 2000. In 1999 and 2000, maternity services
for this plan represented about 2.1 percent and 3.4 percent,
respectively, of its inpatient expenditure and hospital days.
[47] Due to a change in the way that one of the plans reported its
outpatient utilization and expenditure data from 1998 to 1999, we were
unable to compare outpatient data for this plan across all 3 years.
Therefore, the data presented for outpatient care exclude utilization
and expenditure data reported by this plan.
[48] Our prior work indicated that plans withdraw from FEHBP for
several reasons, including low enrollment and noncompetitive premiums.
See U.S. General Accounting Office, Federal Employees’ Health Program:
Reasons Why HMOs Withdrew in 1999 and 2000, GAO/GGD-00-100 (Washington,
D.C.: May 2, 2000).
[49] The Blue Cross Blue Shield Association negotiates the contract for
the Blue Cross and Blue Shield (BCBS) service benefit plan.
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